January 5, 1998
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 - 5th Street, N.W.
Washington, D.C. 20549
Re: Proposed Amendments to Rules on Shareholder Proposals (Release
No. 34-39093, File No. S7-25-97)
Comments of Davis, Cowell & Bowe
Dear Mr. Katz:
We have represented shareholders in several cases arising under
Section 14a. The cases that have been litigated to judgment are Pacific
Enterprises vs. Weinstein (C.D. Cal. 1989); United Paperworkers
International Union v. International Paper, 985 F.2d 1190 (CA 2 1993);
Chambers v. Briggs and Stratton (893 F.Supp. 861 (E.D. Wisc. 1995);
Fountain v. Avondale Industries 1995 U.S. Dist. LEXIS 5598, Civ. No. 95-
1198I2 (E.D. La. 4/21/95); and International Brotherhood of Teamsters v.
Fleming Companies, No. CIV-96-1650-A (W.D. Okl. 1/24/97) 1997 U.S. Dist.
LEXIS 2980. All these cases involved shareholder resolutions, except
Pacific Enterprises, which was an unsuccessful attempt by the issuer to
stop solicitation of proxies for a union officer who was a candidate for
director. We have also represented shareholder proponents in "no action"
procedures before the staff. We have done so many times, including in Idaho
Power Company (Mar. 13, 1996) and Borg-Warner Security Corporation (Mar.
14, 1996).
We offer our comments on three of the proposed rule changes: (1) the
proposed change to Rule 14a-8(c)(4), under which the Commission would keep
the rule allowing shareholder resolutions to be excluded from proxy
materials if the resolution is in furtherance of a "personal grievance",
but would abdicate the responsibility of applying this part of the rule;
(2) the proposed amendment of Rule 14a-4 to deprive shareholders of the
ability to vote on the company's proxy card for or against shareholder
proposals; and (3) the proposed change to resubmission thresholds under
Rule 14a-8(c)(12). That we are confining our remarks of these three
subjects does not indicate agreement with the other changes that have been
proposed (except the relaxation of the "ordinary business" exclusion, which
we support in concept). The Commission has and will receive a large number
of comments on all the features of its proposal, including from many of our
clients. We have concentrated on these three subjects because we believe
we are able to add additional dimension to the thinking on them because of
our experience.
Rule 14a-8(c)(4): "Personal grievance" exclusion
The proposed change to (c)(4) is unwise. We understand that the staff
does not have the time to conduct a quasijudicial inquiry into what a
proponent's motivation -- or motivations --may be. It also does not have
any mechanism clearly available for such an inquiry. We have been through
this process a number of times. See, e.g., Consolidated Freightways
(3/8/93). The issuer's attorneys assemble a portfolio of threads and
patches, mostly media clippings, none of which (even if it met evidentiary
standards, which it usually does not) reveals overtly an ulterior purpose
for proposing the resolution. The staff is then asked to divine from this
assemblage that the shareholder has another purpose besides the ostensible
object of the resolution, a purpose which is for the most part cleverly
hidden but which can be detected through the hints the issuer believes it
finds in the media and other communications. The shareholder denies having
such a purpose. The staff has found, understandably, that it cannot make
any determination from such a record. In some cases, like Consolidated
Freightways, the staff has declared that it cannot answer the question and
has left the matter for resolution between the shareholder and the issuer.
This means litigation, unless the issuer decides to include the proposal
despite its beliefs about motivation (this is what happened in Consolidated
Freightways). The staff has recognized tacitly, and we agree, that only
the courts have the means to resolve questions like this: through discovery
and the taking of testimonial evidence, as to which credibility findings
may be made.
The proposed change to (c)(4) would make the approach in cases like
Consolidated Freightways universal and permanent. It would be available to
an issuer with no other basis than saying it thought there was a hidden
motive. There is no threshold quantum of evidence required, nor can there
be realistically, as we have noted. Thus, the following scenario will take
place. An issuer that does not want to run a Rule 14a-8 proposal simply
needs to say to the staff that it believes there is a personal grievance
behind the proposal, even though this is not shown on the face of the
proposal. The staff will then reflexively state that it takes no position
on this grounds for exclusion. If the issuer continues to refuse to
include the proposal, the shareholder must sue in federal court to compel
inclusion. Alternatively, the issuer may file suit for declaratory
judgment that it does not have to include the proposal. Such a suit may be
filed in any district where the issuer does business, which of course can
be very inconvenient for the proponent. See, e.g., Idaho Power Company v.
UFCW 99R, Case No. CIV-96-0087S-LMB (U.S.D.C., D.Id.) (proponent in
Arizona, declaratory judgment action filed in Idaho). A variation on this
scenario is that the issuer does not inform the proponent of its intentions
after the staff issues its non-position. Nothing in the proposed change to
(c)(4), and nothing else in the law, requires the issuer to advise the
proponent in these circumstances what it intends to do. The proponent
would not know until the issuer actually mailed its definitive proxy
statement what course of action it decided to follow. The proponent would
thus be faced with the prospect of not only having to litigate to have its
proposal considered, but having to do so on short notice. The federal
courts are reluctant to issue pre-meeting injunctions, even where there is
a violation of Section 14a. See, e.g., United Paperworkers International
Union v. International Paper Company, 801 F.Supp. 1134 (S.D.N.Y. 1992).
Usually, given the timing between the mailing of definitive proxy materials
and the meeting, and the length of time consumed in litigation, this would
mean having to postpone the shareholder's meeting.
The greatest problem, putting aside these procedural difficulties, is
that the matter must inevitably end up in federal court if the proponent
and the issuer continue to dispute the includability of the proposal and
want the government to resolve the dispute. This means that the agency
will have created an administrative rule which it does not administer. It
is tantamount to the agency conferring jurisdiction on the federal courts.
This is an approach which may well be unique in administrative law.
Certainly, we know of no other situation like this. Indeed, its
constitutionality may even be suspect for this reason.
Litigation is expensive. We were astonished to see no mention of this
factor in the Commission's "Cost-Benefits Analysis" Part VI, pages 25-28.
Of all the changes proposed, this is the one that probably will entail the
greatest increase in cost. We don't know whether this serious omission was
an oversight or intentional. If it was intentional, we don't know
whether it was omitted because of the embarrassment it causes for the
proposed change, or because of a lack of data. We can help with data. The
following is a chart of fees and costs we have incurred in representing
plaintiffs in Section 14a actions.
Case Fees and Costs
Fountain vs. Avondale $28,282.00 fees
$4,219.00 costs
International Brotherhood $32,273.00 fees
of Teamsters v. Fleming $3,173.00 costs
UPIU v. International Paper $69,065.00 fees
$6,356.00 costs
Chambers v. Briggs $16,510.00 fees
& Stratton $1,007.00 costs
Fees and costs to date. The litigation is continuing.
These figures greatly underestimate the true cost of the actions.
First, they include only the fees and expenses incurred by our firm. In
each of the listed cases, we were joined in representation of other
plaintiffs by counsel admitted to practice in the district court where the
action was brought (in each case, in the district where the company was
headquartered). The fees and expenses of our local counsel are not
included. Second, our bills are very low compared to those of counsel
representing management. We believe that management counsel billed several
times what we did in each of these actions. Management did not personally
pay for these defenses, of course; the shareholders' money was used.
Third, these actions used the resources of the federal courts. We see no
evidence that the Commission has asked the Judicial Conference of the
United States for its views about the wisdom of shifting this work from the
Commission's staff to the federal courts. The figures shown above also do
not accurately reflect what it would cost to litigate a case under the
proposed new rule. The cases listed involved issues that were almost
entirely legal in nature, where the facts were either unimportant or not in
dispute. The cases that would be created by the new rule, however, would
be fact-intensive. Because the whole question would be whether the
proponent had hidden motives not disclosed on the face of the resolution,
document discovery and witness depositions by defendants could be
justified. Representing plaintiffs-proponents, we would certainly
contemplate discovery of the same sort into the issuers' true motives for
wanting to exclude the proposal (for we believe in many cases that the
assertion of "personal grievance" is itself only an insincere smoke-screen
for managements unwilling to face the shareholders on important issues.)
The shareholders can recover their fees and expenses if they succeed
in Section 14a cases. The plaintiffs in all the cases listed above except
Chambers were awarded their fees and expenses. This does not, however,
ameliorate the bad effects of the proposed rule. Even though the
plaintiffs-proponents did not have to pay their own fees and expenses, the
shareholders as a group had to bear the litigation expenses of both the
winning plaintiffs and losing defendants. The taxpayers had to absorb the
costs of the courts' resources. Moreover, in cases involving litigation of
hidden agendas, invasive discovery is predictable. Some shareholders,
perhaps many, would be deterred from submitting resolutions by the prospect
of being torn away from their normal activities and subjected to accusatory
grilling about their motives. Therefore, the new rule might well reduce
the number of resolutions submitted, but for the very worst reason:
suppression of the free expression of shareholders' interests by fear of
litigation.
Finally, and we believe most importantly, the proposed rule betrays an
inability to grasp the basic workings of democracy in the United States.
Shareholder resolutions are exactly analogous to governmental legislation -
- especially the initiative process. As in the public arena, shareholders
have many different agendas and points of view. They may vote in favor or
against a proposition for any number of reasons or motives, some of which
may conflict wildly even among people voting the same way. Proponents and
opponents campaign -- lobby -- for the vote, using any and all arguments at
their disposal. Different people with completely different interests may
lobby for the same result. That is the political process. But it does not
mean that the intent or motive of an enactment will be evaluated by
examining the state of mind of everyone who campaigned or voted for it.
The federal courts "will not strike down an otherwise constitutional
statute on the basis of an alleged illicit legislative motive." United
States v. O'Brien, 301 U.S. 367, 383, 88 S.Ct. 1673, 1682, 20 L.Ed.2d, 672,
683 (1968). The Commission should take the same approach to shareholder
resolutions. It should follow the wise advice of the Supreme Court and not
encourage looking behind facially valid shareholder proposals to find
hidden agendas that are imagined to exist.
Rule 14a-4: Discretionary Voting Authority
The greatest defect in this proposal is giving management the right to
print a proxy card that does not give shareholders the right to vote for or
against the shareholder proposals which have been duly submitted well in
advance of the printing and mailing of the proxy statement and proxy card.
Under this proposal, shareholders would only have the right to withhold
authority from management instead of instructing a "yes" or a "no" vote.
No attempt is made to justify this radically undemocratic approach to
corporate elections. The proxy card is printed at shareholder expense. It
is effectively the ballot in the election. What possible justification is
there to deny shareholders the opportunity to express their wishes on this
card? It can't be cost. There is no cost including a "yes" box on the
card. It can't be fairness. There's nothing at all fair about depriving
shareholders of the right to cast a single proxy card, printed at their
expense, which gives them the right to vote on each issue submitted to
their meeting. It can't be efficiency, because the proposed change would
create a mess.
Many institutions which support various shareholder proposals
nevertheless do not want to give proxies to anyone but the company
management. For these shareholders, the options would be: (a) give only
one proxy, to management, and withhold authority to vote for one or more
shareholder resolutions despite actually supporting the proposals, and
thereby effectively abstain from voting for the proposals they favor; or
(b) go to the trouble -- and the expense of staff time for handling -- of
submitting two proxies, one to the proponent on just the proposal and one
to management on everything else. The second alternative requires great
care to avoid giving conflicting instructions. This burden is not only put
on the shareholders, but also becomes the problem of proxy tabulating
services such as ADP, which must deal with multiple, potentially
conflicting proxies that will probably arrive at different times. This
will cause additional cost because of the additional work, and added
potential for error. It can get even worse than what is described above:
consider the case of a company with multiple shareholder resolutions
subject to independent solicitations. If a shareholder cannot vote for any
of the shareholder resolutions on the company proxy card, but nevertheless
wants to vote on them, it may have to give a proxy to each of the entities
conducting independent solicitations. The opportunities for conflict and
confusion, and additional costs, are evident.
None of this is reflected in the Commission's analysis of costs.
The Commission's Release, in fact, gives absolutely no rationale for
why shareholders should be deprived of the right, which they now have, to
vote yes or no on the company's proxy card. Indeed, the discussion (page
18) is elliptical. Currently, the company need not give shareholders the
option to withhold authority on matters as to which management retains
discretion because it has not received notice of a matter enough time
before it mails its definitive proxy materials. Under the revision, this
would not change. Currently, if management does get notice enough time
before it mails, shareholders must be given the options of "yes", "no" and
"withhold". Under the revision, "yes" and "no" would be taken away. This
cannot be viewed as anything but a net loss to shareholders of their voting
franchise. The analysis in the Release is written in a manner to suggest
that shareholders would be getting some greater control over the
disposition of their voting power, but this does not withstand careful
scrutiny.
On the other hand, we believe that it is sound to establish a date
certain for determining when a company has sufficient advance notice of a
shareholder proposal to require inclusion on the company proxy card of an
opportunity to vote on the proposal. We think that 45 days is too long.
It should be recalled that a company is not required to include in its
proxy materials a shareholder statement in support of a resolution
submitted in this manner. All that is involved is putting boxes for a
shareholder to check on a proxy card. Management can, if it wishes,
include its unilateral statements on the subject of the proposal in the
proxy statement, but this is not required. The drawn-out mechanics under
Rule 14a-8 are not involved. The little that needs to be done under Rule
14a-4 can be accomplished easily in 30 days.
We also think that the proposal to have the deadline for submission
provided in Rule 14a-4 overridden by a bylaws provision regulating the
timing of submission of proposals is acceptable, and even necessary to
avoid a situation where the Commission's timing rule and the bylaws timing
rule produced little or no intersection. The override should not, however,
be limitless. A bylaws provision requiring submission of a proposal more
than 120 days before the anniversary of the last annual meeting should not
be honored. Experience has shown that there is no need for a longer period
than 120 days (i.e., there has been no call to change this time period
under Rule 14a-8, and the Commission has not proposed to do so). Allowing
a company to impose a longer period of time would simply disenfranchise
shareholders. This is especially true when it is remembered that the
purpose of Rule 14a-4 is to require shareholders to have the opportunity to
use the company's proxy card to vote on matters that are known to be coming
before the meeting, while at the same time not putting undue time pressure
on the composition, printing and mailing of proxy materials.
Rule 14a-8(c)(12): Resubmission Thresholds
The Commission should consider establishing two different series of
thresholds for resubmission of proposals. We believe an important
distinction exists between proposals having to do with a company's business
and its governance, on the one hand, and social-policy proposals, on the
other. Higher thresholds make sense for business-policy proposals, but not
for social-policy ones.
Because the objective of an investment is gain, resolutions about
major business decisions and governance structure have broad potential
appeal. These proposals are made for the purpose of improving performance,
which is something in which all shareholders are interested. If a
resolution fails to garner a significant level of shareholder support, this
means that most shareholders do not see it as being likely to enhance their
returns. Because the resolution has no other purpose, it makes sense to
send it to the sidelines.
Social-policy resolutions, however, serve multiple purposes. Although
the focus of our own practice has been on helping our clients with
business-oriented proposals, we see that proposals raising important social
issues exercise an influence far greater than the number of votes they
receive. Sometimes, a social issue can have such consequences that it will
be perceived as having a direct bearing on a company's performance and may
be voted on accordingly. This was true in the later stages of the effort
to bring down apartheid in South Africa. More often, a social-policy
resolution is not seen as affecting significantly the bottom line. Small
votes are received by these proposals, in contrast to ones dealing with
business-direction and governance proposals. This is natural in view of
the fact that all shareholders have invested in stock to make a gain, and
only a few select their investments by social-policy criteria. If a
social-policy resolution receives any appreciable shareholder approval --
which we think is appropriately measured by the existing thresholds -- this
is significant. It is an expression of conscience on an idea that may not
produce any investment return and may even detract from it. Management
must take heed when any appreciable number of shares is voted in favor of
an idea which subordinates the natural objective of investment. We believe
this has happened, in matters such as ending apartheid in South Africa and
improving environmental practices and reporting. We believe it would have
happened in the case of employment discrimination if shareholders had been
able to propose resolutions on this subject. Indeed, it is arguable that
companies such as Texaco might have avoided the employment discrimination
troubles they experienced if shareholders had been able to sound the bell
for attention to this problem. But if the thresholds are increased for
these resolutions, the small but persistent voice of conscience will be
silenced quickly. Ethics and corporate responsibility are now a prominent
feature in the management program for most companies. These goals cannot
be truly realized unless shareholders are able to engage management on the
questions of what is ethical and what is responsible.
In addition to establishing a two-tier approach to the thresholds, we
believe that the proposed increase in thresholds is too much even for
business-policy and governance proposals. The thresholds go up too high,
too fast. It takes a while for an idea to catch on. Take poison pills,
for instance. This anti-takeover device is said to have been first
conceived in December 1983. It spread very rapidly, so that by 1986, most
of the companies that would have poison pills had adopted them. Although
opposition to the pills began almost from their inception, the first anti-
pill resolutions to have success were, we believe, in the 1990s. Now, the
overwhelming majority of institutional investors oppose this device and
will vote for resolutions against it. Not only is time needed for
shareholders to become familiar with the concept of a proposal, but they
also need time to evaluate experience to determine whether they think the
proposal would make a difference.
Thank you for your attention.
Very truly yours,
Richard G. McCracken